Probably one of the most important research articles on worker ownership was published by Tal Simons and Paul Ingram: “Organization and Ideology: Kibbutzim and Hired Labor, 1951-1965”. It is both an important practical article and a key theoretical article. In it, the authors present real-world research on the link between ideology and degeneration in worker-owned businesses, but first, to serve as context for their analysis, they set out a detailed and valuable theoretical model of the fundamental role of ideology in organizations and in society as a whole.

This is one of my all-time favourite articles and I reference it frequently in my day job as a sociolinguist. Simons and Ingram’s thoughts on how ideology works in society have deeply influenced how I understand the sociology of language use and language revival, but their article has also profoundly influenced how I understand the world in general, how I understand organisations and their place in society, how I understand social change and social movements, and in relation to the subject of this blog, how I understand what makes a successful worker-owned business.

The subject of Simons and Ingram’s paper are kibbutzim, radical Jewish communes in Israel that share many features with worker-owned businesses. Kibbutzim are places to live, but they are also places to work, in agriculture and in other industries, and in their article, Simons and Ingram track employment patters in several different kinds of kibbutzim between the years of 1951 and 1965, studying how these unique communes struggled over this time to resist degenerating into capitalist organizations and to stick to their founding socialist principals.

Just like in worker-owned firms, ideally, everyone who works at a kibbutz should also be a member of that kibbutz, but under economic pressure, many kibbutzim started hiring more and more outside workers in this period, significantly degenerating away from their founding, democratic philosophy, and Simons and Ingram show that ideology played a central role in determining how much hired labor the various different kinds of kibbutzim employed over time. The authors found that those kibbutzim that shared a strong, collective ideology were far less likely to degenerate.

This research supports the idea that building a strong, shared cooperative ideology in a worker-owned business is key for success, but some folk may have a hard time with the idea of promoting a particular ideology in their cooperative because the word ideology often has a negative connotation. However, that is not how I use it here, or how Simons and Ingram use the word in their analysis. As Simons and Ingram define it, an ideology is simply a particular way of making sense of the world. Some ideologies can be positive; others can be negative, but they are unavoidable. We all have our own ideologies that we use every day to get through our lives.

In a business sense, we can understand ideology as the mission or the vision of a company, the fundamental philosophy that underpins how a company does business. For most businesses, that philosophy is some form of capitalism, but for worker-owned businesses, it is more likely a version of collectivism or socialism, and Simons and Ingram show that if a worker-owned business promotes a strong, shared ideology among its members, it will be less likely to degenerate into a capitalist business over time.

This certainly seems to be the case for the Mondragon cooperatives in the Basque country in Spain. Researchers theorize that the original, very strong founding ideology of the Mondragon Corporation has progressively weakened over the years, and that this has lead the Corporation to significantly degenerate: buying up foreign subsidiaries, but not converting them to cooperatives in their own right.

A strong cooperative ideology is therefore an important resource for a worker-owned business in its efforts to avoid degeneration, but this raises the practical question: how exactly is a strong shared ideology built and maintained in a business? Simons and Ingram argue that ideology is managed in organisations in two basic ways: through socialization and through selection. By selection, they mean recruitment, that an organisation can try to manage its internal ideology by selecting members who share in that ideology already. Selection is frequently how worker-owned startups establish their cooperative ideology, by deliberately seeking out co-founders who are enthusiastic about starting a collectively owned and operated business.

But selection can only get you so far. As a worker-owned business grows, it can’t count on always finding new employee-owners who will come to their jobs already committed to cooperative ideals. Eventually, worker-owned businesses will need to manage their internal ideology through a continuous process of socialisation, or as it is usually called in this instance, cooperative education. Capitalist businesses usually don’t have to worry too much about socializing their employees in this way. We live in a world where capitalism is the dominant economic system, so most workers would come to a capitalist business already understanding the basics of what it means to be an employee working for a wage.

But worker-owned businesses don’t have this advantage. They are swimming against the tide of the general capitalist ideology of our society, and so they can’t assume that their employees will fully understand the difference between being a worker-owner of a cooperative and being an employee of a private business. If worker-owned businesses are to succeed they have to constantly strive to educate their members about the philosophy and practicalities of running a cooperative. The pioneers of the cooperative movement clearly understood this and named education as the fifth fundamental Rochdale Principal of cooperative organisation:

Co-operatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their co-operatives.

It is clear from this research, and also from the Mondragon example, that cooperative education is not something that can happen once and then be left behind; it has to be a ongoing part of the day-to-day business of the cooperative. The capitalist ideology of our society is so strong that cooperatives have to build cooperative education into the basic design of their businesses, as a continuous process, or over time, the committent of members can fade and cooperatives risk degenerating. But cooperative education costs money and time, and it takes discipline to stick to a ongoing employee-owner education program, particularly if a cooperative is struggling. It is no wonder that many worker-owned businesses let cooperative education slide over the years, but Simons and Ingram’s research shows this is a grave error.

In their study, Simons and Ingram also show that outside organizations, particularly banks, can work to force cooperatives to degenerate. They show that the kibbutzim with the greatest reliance on loans from banks were also the fastest to employ outside labor, presumably because their lenders used the leverage of their debts to force them to adopt more capitalist ways of doing business.

In my recent interview with Kateri Gutierrez of Collective Avenue Coffee, she spoke to a similar problem her coop faced when it came to raising startup capital, reporting that investors had approached her cooperative about funding, but that they had turned them away because the investors were not simply interested in loaning them money, but also were interested in establishing outside control their new business.

This is one more reason, perhaps, that individual cooperatives, as well as the worker-ownership movement as a whole, may need to develop new ways to self-fund cooperative start-ups or expansions through some form of mandatory profit plow-back structures. Capitalist banks and investors are not value-neutral; they come with their own ideas of how businesses should be run, and if they loan a cooperative money, they are in a powerful position to tell that cooperative how to do business.

In 2010, Zachary Sheaffer, Benson Honig and Abraham Carmeli published a research article that confirmed and expanded on Simons and Ingram’s findings. They gathered historical data on 171 kibbutzim from the years 1990 to 1997, and using a range of measures of degeneration, again demonstrated that a strong shared ideology is a key feature that protects cooperative organisations against degenerating.

This is clearly then a very robust set of finding, and together, all this research strongly suggests that founders of new worker-owned firms should carefully plan how they will use selection (recruitment) and socialisation (cooperative education) to establish a shared collective ideology in their business that will give them the best chance of succeeding for years to come.

Kateri grew up in Lynwood, a working-class neighbourhood in LA, and gained her first business experience selling health products with her mother and tamales on the street to help her family make ends meet. She attended the University of California, Berkeley, and wrote her undergraduate thesis on the impact on social media on consumers as citizens. After graduating, she worked for a time at the Disney corporation before returning to Lynwood to set up Collective Avenue Coffee. Kateri believes her time working in corporate America taught her valuable lessons that she draws on as she and Jonathan build their own worker-owned business.

I don’t see myself going back to corporate; it didn’t match my values, but what I did take away is that you need to be efficient. Coops need to combine democracy with efficiency. In the end, a cooperative is a business, and the business has to thrive for the workers to survive. The coop movement can get symbolic very quickly, and we can forget to pay attention to the everyday process of running a successful business.

Like many other entrepreneurs looking to set up a worker-owned firm, Kateri and Jonathan lacked access to capital, so rather than start with a permanent, brick-and-mortar shop, Collective Avenue Coffee was launched as a pop-up shop, appearing at various venues and events around the neighbourhood. Kateri recommends this as a relatively low-risk, low-capital way to get a worker-owned business off the ground.

We did have investors interested, but we wanted to maintain the integrity of our worker coop, so we turned down the investors’ proposals. We offered them the alternative of writing loans for us, but they seemed to be more interested in establishing outside control of our business.

Recently, Collective Avenue Coffee has joined forces with two other worker-owned cooperatives and one certified B corporation, and together they are working to establish a cooperative hub in their neighbourhood, which they have christened COOP LA, that will house all four of the enterprises under one roof.

Opening COOP LA and moving into a brick-and-mortar space will be a big step for Kateri and Jonathan. Keeping the cooperative going over the last three years, even as a pop-up, has been a struggle. For the first two years particularly, the cooperative did not make enough money to allow Kateri and Jonathan to regularly pay themselves, and so Kateri worked as a substitute teacher on the side. Even now, the coffee shop doesn’t make quite enough money for them both to earn a living from the business, but Kateri says that in spite of all the struggle, she has never felt alone.

Entrepreneurs often feel alone, but if you start with a coop, it is a collaborative effort right from the beginning. When you distribute the work-load and responsibility, there is less stress.

Kateri believes that growing the worker-owned cooperative sector in the US will not only require a cultural shift, but will also require better basic support for cooperative start-ups. When they were first setting out, Kateri and Jonathan approached the Small Business Administration, a US government agency supported by tax dollars, and asked for help, but they found that the business coaches working for the SBA knew very little about worker cooperatives:

We went to the SBA for help, but felt that rather than learning from the coaches, we were teaching the coaches about coops.

It is clear from speaking to Kateri that while she is working hard to establish a workers’ cooperative in her neighbourhood, she is ultimately working to spark a broader cooperative movement in LA. In addition to collaborating on COOP LA, Collective Avenue Coffee runs an apprenticeship program for teenagers and young adults in Lynwood, and also invites community members to attend their meetings and get involved in the development of the business.

We wanted to create an alternative in our community. We chose a coffee shop because it is a place where people can socialize. To make a change, we have to set an example. We have to show the glamorous and the not-so-glamourous. The coop movement is not glamourous, but it is necessary if we want sustainable change.

Worker cooperatives may not be glamorous, but if we grow them fast enough, they will change the world, and the COOP LA project feels like just the sort of initiative that could provide a foundation for a growing cooperative movement in LA. It will be interesting to check in with Kateri and her fellow co-owners in a few years and learn how their project has developed.

This is a first in what I hope will be a series of practical articles about the nut and bolts of setting up a worker cooperative. In this first article, I’m going to take a look at an important but poorly-understood subject: minimum profit plow-back rules.

A key to success?

The size and strength of the cooperative sector varies enormously from country to country and from region to region around the world, and while there are all sorts of reasons why cooperatives might be more common in some places than in others, one particular factor stands out: in regions where cooperatives are strong, they often share a particular type of internal financial arrangement called a minimum profit plow-back rule. Indeed, it seems that minimum profit plow-back rules may be behind the success of many of the most well-known cooperative groups, like the Mondragon cooperatives in the Basque country, and the cooperatives in the Emilia-Romagna region of Italy.

Minimum profit plow-back rules help cooperatives raise the capital they need to grow and multiply, and because they accelerate the growth of cooperatives, these rules could prove to be the key to expanding worker-ownership beyond the fringes of the global economy, but unfortunately, it is hard to find much detailed, practical information about these rules in the literature. In this post, I want to share what I have discovered so far. It’s a fairly short post now, and that is a measure of how difficult it is to find information about these structures, but I plan to add to it little by little as I learn more. If you have any information or experience with minimum profit plow-back rules, please share it the comments below.

The capital problem

Cooperatives tend have a capital problem. While capitalist business-owners and entrepreneurs are often very rich, and therefore have access to money to start up their businesses and to expand, worker-owners generally do not have the same access to capital — they aren’t personally rich and banks are far less likely to extend them credit — so they have to find other ways to raise money. A minimum profit plow-back rule is one way a worker cooperative can solve this capital problem for itself over time.

There are all sorts of different ways to implement these structures, but basically, a minimum profit plow-back rule requires a cooperative to save or to reinvest a certain percentage of its profits back into the business each year; in other words, it requires the cooperative to create its own capital reserves. Sometimes these rules are imposed by the state as a legal condition for incorporating as a cooperative, and at other times, like in the case of the Mondragon Corporation, the rules are internally imposed by the cooperative group itself.

Italian Cooperatives

By law, cooperatives in Italy are required to plow back at least 30% of their net profits, although research shows that Italian cooperatives often voluntarily plow back much more than this, sometimes up to 100%. These capital reserves cannot be divided between members, even if the cooperative eventually closes shop. This arrangement is usually called an asset lock. (Navarra 2016; Navarra 2009; Pérotin 2012)

Italian law rewards cooperatives that reinvest their profits in this way with a tax break: up to 70% of profits can be made exempt from corporate income tax if they are reinvested, and it was widely assumed that the high level of reinvestment seen in Italian cooperatives was a result of this incentive, but when Cecilia Navarra (2013) actually studied the behaviour of Italian cooperatives, she found this was not the case. Rather, she found that Italian cooperatives reinvest most or all of their profits as a way to insure against economic downturns, to protect employment, and to keep wages stable. She also cites research by Alberto Zevi (2005) showing that Italian cooperatives have been growing faster than equivalent capitalist businesses, and she believes that greater capital reinvestment may be a factor contributing this faster growth.

The Mondragon System

The profit plow-back arrangements in the Mondragon Corporation are more complex than most, but they are also particularly powerful. One key feature of the Mondragon system is that very early on their history the Mondragon group of cooperatives set up their own bank: the Laboral Kutxa (formally called the Caja Laboral). The Laboral Kutxa is a worker-owned credit union that in addition to serving as a regular public bank in the Basque region of Spain, also serves as the principal commercial bank for the Mondragon Corporation. The Caja Laboral was founded in 1959 as an integral part of the Mondragon cooperative system, and all of the individual firms in the Mondragon Corporation are tied to it.

Everyone agrees that Mondragon’s cooperative bank […] was vital to its expansion. The [cooperative bank] mobilized the savings of thousands of depositors and funneled them into the growth of the coops. (Dow 2003, 65)

The Mondragon system is constantly evolving, but according to the best information I have just now, the Laboral Kutxa requires all of the Mondragon cooperatives to set up three streams of profit plow-back. Net profits (after wages) are divided between a social fund (10% used to fund community social projects), a collective capital reserve fund (a minimum of 20% for direct profit plow-back into capital reserves), and the remainder is deposited in individual workers’ capital accounts. When new worker-owners join a Mondragon cooperative, they have a capital account set up in their name. Seventy percent of the cooperative’s net profit are deposited in these accounts, and the members can withdraw this money when they retire, but in the meantime, the Mondragon system is free to use this money as investment capital. (Dow 2003, 60-1)

The power of the Mondragon system is that, because they all share their own bank, all these capital reserves get pooled together in the Laboral Kutxa (Caja Laboral) and can be used as capital to start new cooperatives:

The main purpose of the [cooperative bank] was to finance the creation and expansion of worker cooperatives and other cooperative organizations. (Whyte and Whyte 1991, 52)

Suma Wholefoods

Suma Wholefoods is remarkable as a fairly large worker-owned cooperative in the UK that maintains a perfectly flat pay structure: everyone earns the same wage per hour, and in the 80s, Suma apparently implemented an interesting form of profit plow-back based on wages. They set up a cooperative development fund to help aid other cooperatives, and every time they voted themselves a pay raise (pay rise), they would deposit an equal sum in the development fund. (Parker 2018, 117)

The cooperative ecology

One can understand the cooperative sector as a kind of ecology, with new cooperatives constantly being founded (or “born” into the ecology), and established cooperatives leaving the ecology (or “dying” out of the system) by going bankrupt or converting. This ecology model of the cooperative economy would also include those supporting organizations that facilitate the growth of cooperatives, like credit unions and cooperative incubators. The cooperative sector as a whole grows if more cooperatives are “born” into this ecology at any one time than “die” out of it, and it seems clear that minimum profit plow-back is one way to strengthen the birthrate and longevity of cooperatives. Further, as demonstrated by the Mondragon system, the advantages of minimum profit plow-back rules are turbo-charged if a system of cooperatives all share the same cooperative bank.

These sorts of structures are definitely worth considering if you are founding a worker-owned firm. Rarely would founders of a worker-owned cooperative be thinking much about future profits as they are setting up their business; they may expect to struggle for months or even years just to break even, but these structures would be much easier to build into the design of a cooperative from the start. Then, when the business finally does first turn a small profit, the structures would be firmly in place and fully agreed.

Also, as the cooperative movement as a whole lobbies to have worker-cooperatives better recognized in corporate law in jurisdictions around the world, it would be worth building minimum profit plow-back into this legislation, mandating this structure in the design of worker cooperatives as it is in Italy and elsewhere.

Sources:

Dow, Gregory K. (2003) Governing the Firm: Workers’ Control in Theory and Practice. Cambridge: University of Cambridge Press.

Richard Wilkinson and Kate Pickett’s book, The Spirit Level, was a rigorous, evidenced-based exploration of the damage economic inequality does to society. Published in 2009, it came out at just the right moment, and along with the Occupy Movement and the Bernie Sanders campaign, it played an important part in opening up a new conversation about class, in the USA in particular.

Their new book, The Inner Level, examines the damage that inequality does to our psychological health, and it is just as powerfully-argued, evidence-based and rigorous. I found it particularly helpful in trying to get to grips with the psychology of the rise of Donald Trump and the politics of Brexit in the UK. The evidence they gather shows how inequality raises levels of fear and anxiety in societies. These, of course, are some of the same emotions that feed the politics of nationalist populism, which in turn lead to social policies that widen the economic gap, driving us around in a perverse vicious cycle of social self harm. In a society caught in a cycle of growing inequality and anxiety, a leader like Trump isn’t an aberration; in unequal societies, sociopaths like Trump naturally rise to the top:

Greater inequality not only causes psychopathic tendencies to manifest in more people, it provides the cut-throat environment in which those tendencies come to be seen as admirable or valuable … (74)

This is a very important book that has been published at a critical time, and their conclusions will be particularly interesting to readers of this blog because at the end of their analysis they set out a program of actions that we could take to reduce economic inequality, and foremost amongst their recommendations is greatly expanding worker ownership:

The next great stage in human development must therefore be the extension of democracy into working life. (264)

Interestingly, they take the opposite view to Gregory K. Dow’s in his book, Governing the Firm, which I reviewed earlier. Dow was reluctant to recommend worker cooperatives as a means to reduce economic inequality, in part because he was afraid that this would stigmatize the cooperative movement as being too political and radical, holding back the acceptance of cooperatives as a part of the mainstream economy, and instead, he recommended progressive taxation as a better way to deal with rising inequality.

Wilkinson and Pickett also see a place for progressive taxation, but are skeptical that taxation alone will provide a lasting solution to the problem of economic inequality:

Because it is easily reversed, the redistribution of income through taxes and social security benefits is particularly vulnerable when so many people regard taxes as a kind of legalized theft of income which they feel they have earned and have a right to. (246)

In their view, tax policy is too vulnerable to the whims of politicians like Trump. Rather, they favor expanding worker-ownership because this would build greater equality into the structure of the economy itself:

By far the most important long-term measure, however, will be the reduction of pre-tax income differences by extending democracy into the economic sphere. (256)

The Inner Level builds on the argument that Wilkinson and Pickett set out in The Spirit Level but also takes it in a new, important direction that is once again eerily relevant to the political situation we find ourselves in just now. They show how much of the anxiety and division we see around us in the world can be traced back to the psychological impact of economic inequality, and suggest that worker ownership may provide us with the best road out of this mess.

I have a new favorite book! Ever read a book that comes at just the right moment, that seems to perfectly sum up how you are thinking or feeling about something, and then points a way forward? I had that experience this weekend with Martin Parker’s new book, Shut Down the Business School: What’s wrong with management education.

Parker is a Professor of Organisational Studies at the University of Bristol in the UK, and his thesis is that much of what is wrong in the world can be traced back to the business school and how management is taught there. In his view, business schools can’t be reformed; they should be shut down, and in their place he proposes a new kind of school: a school of organizing that would study and teach about all kinds of organizations, not just capitalist corporations, and this would definitely include worker-owned firms. In fact, he uses the worker-owned organic food distributor, Suma Wholefoods, as one of his examples of the kind of organization that main-stream management education typically ignores.

Shut Down the Business School is a short book and I blazed through it. Parker sprints through some of the main theoretical debates in politics and organizational theory, but manages to keep the discussion largely jargon-free. And he is really funny and irreverent. This is a book (partly) aimed at academics, but it isn’t academic at all in tone. I was often laughing and underlining zingers as I read.

This is a theoretical book, or a manifesto perhaps, and for readers of this blog who are looking for practical advice for starting and managing a new worker-owned firm, you won’t find it here, but still I think you should pick up this book. You’ll be inspired. Parker’s vision of a new economy is so fresh and hopeful, even if you never plan to go near a business school, it is very much worth the read.

Yesterday I published a post about the new book, Jackson Rising, edited by Kali Akuno and Ajamu Nangwaya, and while I was researching Nangwaya to see if I could find his homepage, I stumbled across a short article he wrote about “Labor Entrepreneurship” that discusses some of the central themes of this blog, so I thought I would share it here.

Nangwaya’s article examines the role of innovation in the cooperative economy. One of the principal arguments in favor of capitalism is that it is an exceptionally innovative economic system. In a capitalist economy, you can make money by selling solutions to problems, so entrepreneurs have a strong profit motive to continually innovate, and in general, this is a clear social good. So if it can be shown that worker-ownership is not as innovative an economic system as capitalism, then that would be a fairly strong argument against expanding the cooperative sector of the economy.

So do worker-owners innovate? Is entrepreneurship more common in a capitalist economy, or are there ways to promote entrepreneurship in worker-owned firms?

As we saw earlier, there is some evidence that in times of economic crisis, cooperatives may be less likely than capitalist firms to invest in research and development. And in his article, Nangwaya cites a 1999 think-piece by the economist, Andrew Hindmoor, who argues that most of the Mondragon cooperatives’ success is based on copying innovations from capitalist firms, that Mondragon is “free riding off capitalism” in this respect:

If it is to be argued that an economic system based upon the use of co-operatives will be as efficient as capitalism then it must be shown that they are capable of the kind of innovation that has underpinned economic growth in capitalist countries. Yet this is precisely what the Mondragon example does not show. (221)

While Hindmoor doesn’t produce much data in his paper to back up his claim that Mondragon is not as innovative as similar capitalist conglomerates, I really like the fact that Nangwaya nonetheless confronts the question of entrepreneurship in worker-owned firms head-on, rather than waving it away. While Nangwaya doesn’t agree that entrepreneurship is only for capitalists, he does acknowledge that fostering innovation in worker-owned firms is critical for the success of the cooperative model:

First: worker cooperatives must develop a workplace culture that emphasizes innovation, creativity, product or market leadership, competitiveness, and risk-taking. I look at the obscene development of entities such as Trader Joe, United Naturals, and Whole Foods, and view these capitalist companies as representing the failure of cooperatives (the consumer and worker forms) to be entrepreneurial. Cooperatives and collectives created and grew the natural foods market from the 1960s to the 1990s, but today many of them are shaking in their boots from the competitive pressure of these large natural food companies. Cooperatives should have anticipated changes in consumers’ expectation about their shopping experience, and grew to a size that would have been a barrier to entry by non-cooperative firms.

Jackson Rising is a recent collection of essays about the growing movement for economic democracy and Black self-determination in Jackson, Mississippi, USA. Edited by local activist, Kali Akuno, and the academic, Ajamu Nangwaya, Jackson Rising was published right at the end of last year, so it represents an up-to-the-minute account of this movement. Jackson, Mississippi, is a very poor, Black-majority city who’s population has suffered under some of the worst systemic racism in the US, but in June, 2013, a long-time Black activist and civil-rights lawyer, Chokwe Lumumba, was elected mayor, and his administration adopted a radical plan for the regeneration of Jackson that was founded in part on establishing a network of worker cooperatives in the city. In Nangwaya’s words, the plan was to “transform the city of Jackson into America’s own Mondragon.” (p. 110)

Sadly, Chokwe Lumumba died unexpectedly, just eight months into his term, but in June, 2017, his son, Chokwe Antar Lumumba was elected mayor in a landslide victory, and intends to continue his father’s work. Chokwe Antar Lumumba’s electoral victory was a resounding popular endorsement of his father’s regeneration plans, but critically, the movement in Jackson is much bigger than than just these two men. Centered around the organization, Cooperation Jackson, a broad base of local activists have come together to set up this network of worker-owned businesses.

Readers of this blog will find Jackson Rising both inspiring and thought-provoking, but it should be noted that this collection of essays does not provide a detailed account of the practicalities of setting up worker cooperatives in the Southern US. Rather, the authors in this volume explore the theory behind the movement and how they understand worker-ownership as a key strategy for advancing civil rights and Black self-determination in the US. I learned a lot about the history of my own country from reading this volume, and in the end, Jackson Rising left me feeling exited and profoundly hopeful.